Competitive Pressure Alone Rarely Driving M&A

Observing merger and acquisition activity often resembles an expectant Mother waiting for her kids to get engaged, you wait an age and then a clutch of announcements arise in a very brief time period. The logic of “competitive pressure” drives friends and acquaintances of the family to pass comment, however, ill informed on “how many of their friends are getting married” (need), “how it is about time” (urgency), “how in love they are” (trust) or “how they can now afford to get married” (money). Of course, many of these unsolicited comments are more for the benefit of the speaker than the person they are directed to. My point is that logical reasoning alone rarely causes top management to act. Unless you understand the emotional priorities of top management and their shareholders, you will rarely understand what has motivated them to move on the opportunity. They won’t reveal their emotional objectives unless you first have established a trusting relationship and secondly, you have the social, intellectual and language skills to interact as a “peer”.

Look at the global insurance sector, where the logic dictates that competitive pressure (excess supply of capital and declining demand from buyers) will drive suitors into each others arms at record speed. I have sat with senior executives and an abundance of financial advisers over the past 12-18 months, all shouting from the rooftops that M&A was inevitable. Ask them “who” explicitly, “when” and “why”, and they start shuffling nervously with vague pronouncements.

My observation is that the same rules apply as in human relationships:

Most people don’t know what goes on inside someone’s relationship and the impact on their hopes and dreams. Be very careful who you listen to.

You must be on the “inside” to credibly past comment (you have a peer level trusting relationship with all parties), otherwise your opinion is largely worthless.

Competitive pressure makes people “think” about change but it does not alone cause them to take action

Action is a result of the level of trust and confidence that the “acquired” party has built up that their best interests (power, influence, legacy, promotion and so on) will be served by combining with the acquirer. It is about people, not organisations, spending time together in each other’s company and willingly sharing their emotional imperatives. It is about moving at a speed that is most appropriate for BOTH parties. It is about above reaching conceptual agreement that the combination of their respective “pasts” (expertise, knowledge, history and so on) will enhance their ability to transform their respective futures (happier clients, improved image, more powerful brand, greater profit and so on). It is about a shared belief that the journey to the desired future is planned and will not have catastrophic consequences. This is why “forced” combinations rarely work with strong and dynamic businesses in conservative sectors (insurance, professional services, wealth management etc).

Contrast two such proposed transactions in 2014, the substance and style of John Charman’s increasingly aggressive pursuit of Aspen and this week’s proposal by Mike McGavick and Stephen Catlin to combined XL and Catlin.

If you were to ask yourself why both deals might make sense? You might reasonably state “competitive pressure” (changes to current and anticipated market needs).

If you were to ask yourself what would it take for both parties to get married? You might reasonably state that both management teams had established sufficient trust and confidence in each other’s ability (competency and passion) to make it work (alleviate or even gain from the competitive pressure) and in so doing accomplish their emotional priorities.

If you were to ask yourself will it be a success? You almost certainly couldn’t give a definitive answer without knowing firstly, “What are the critical elements in McGavick and Catlin’s emotional priorities?” Next, “What changes to those critical elements could we reasonably anticipate ?” and finally, “How easily could the cause be eliminated or action taken to minimise the impact and live with the problem?” For example, if one of Stephen Catlin’s emotional priorities as the Company’s founder is to “leave a lasting legacy for our clients and employees”, the critical elements might be perceived trust, integrity and consistency. If post the merger or sale, the new management team change the Sales Incentive Plan to emphasise increased short-term top line revenue growth in specialty business, it is quite possible the effect is a dramatic increase in the churning of clients and greater attrition among long-term Catlin clients. Alternatively, if there is a decision to merge or close the Catlin underwriting hubs in one or more location, it is quite possible there will be an uptick in Catlin’s best people deciding their futures are better served in other firms. The question is then how quickly and effectively could XL Catlin eliminate the cause or mitigate the impact on their clients and employees, and in so doing accomplish Stephen Catlin’s legacy objective.

As an investor, customer, employee, business partner, competitor and so on, you have no option but to apply good judgement and common sense in answering those questions.

For most marriages are rarely without strife and we cannot predict the future accurately.